Saturday April 18, 2015 - 10:51:47 GMT
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Don't Fight the Central Banks
by John M. Bland
Forex Market Manipulation
Supposedly we are in an era of "freely-floating exchange rates", but it seems that Forex markets are anything but freely floating. Exchange rate policy often falls under the purview of governments and/or central banks. They are strongly influenced by monetary policy as well. There is a saying in the financial markets: "Don't Fight the Fed". That is because finance is all about money flows and the Fed controls the cost of money.
What follows is a recounting of what has been happening in some of the major "freely-floating" currencies:
U.S. Federal Reserve (FED)
For the past few years financial market participants have been waiting for the Federal Reserve to exit from its exceptionally monetary policy. 2015 has seemed like the year for this, but so far the economy has not been cooperating. Most still focus on 3Q15 or 4Q15 as the most likely timing for a modest initial hike in the Fed Funds target, but this move will be dependent on an improvement in the economy that has yet to have materialized. The ANTICIPATION of a Fed tightening has provided support for the USD all year. As for an exchange policy, it is not clear what the current U.S. forex policy might be.
European Central Bank (ECB)
The European Central Bank (ECB) fell far behind the curve when it did not recognize for several years how weak its economy had become. It also was slow to come to grips with the fact that it is the central bank for ALL of Europe, not just Germany. About a month ago, the central bank finally embarked on an extreme easing, which included negative interest rakes and a significant weakening of the currency. Thanks to its policies the Euro has weakened sharply this year.
Bank of England (BOE)
The Bank of England is widely seen as second in line to hike interest rates, but as with everywhere else this decision is data-dependent and may not be seen for at least another year. The British Pound trades in the orbit of the Euro and will start to improve when the prospects for a policy tightening become more concrete.
Swiss National Bank
The Swiss National Bank early is the year triggered a severe round of price instability when it abruptly abandoned its 1.2000 support of the EUR to the CHF. These actions caused serious financial stress for numerous institutions and traders. I have heard that they have been back in again last weeK attempting to support the EUR vs. the CHF at just above a price of 1.000.
Swiss National Bank (SNB)
The Swiss National Bank early in the year triggered a severe round of price instability when it abruptly abandoned its 1.2000 support of the EUR to the CHF. These actions caused serious financial stress for numerous institutions and traders. I have heard that they have been back in again last week attempting to support the EUR vs. the CHF at just above a price of 1.000. Keep an eye on this.
Bank of Japan (BOJ)
It seems the The Bank of Japan has been engaged in Quantitative Ease forever. It certainly has been a couple of decades. Importantly after signaling to verbally to the markets that a further weakening of the yen vs. the USD beyond 120.00 was not desired, the exchange rate has been stabilized. Most traders suspect the BOJ has been active behind the scenes recently manipulating the exchange rate.
The upcoming week is a mixed one for data. Tuesday, April 21 sees the German ZEW Survey. This is often used as a predictor of the IFO Survey due on Friday. On Wednesday April 22, quarterly Australian CPI data will be closely watched. U.S. Existing Homes Sales data later that day are the most important U.S. Housing statistic. Thursday April 23 sees a slew of flash PMI releases and U.S. New Homes Sales. On Friday April 24, the German IFO Survey and U.S. Durable Goods data are key features for traders.
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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